All Forum Posts by: Scott P.

You haven't said whether there is anybody living in the unit, which may be a key factor.

Ignore the clueless who don't care about the law (unless you don't care about the law either). You can't just do whatever you want.

Take a look at http://www.evict.com/?page=legnew0706 for how a Florida law from about 10 years ago applies.

Proceed with caution. I would recommend checking in with an attorney on this one.

I cannot imagine there is any possible way to require anybody to pay the rent, except for either [1] the person who signed the lease (who of course cannot pay), or [2] her estate. If a family member offers to pay and you feel comfortable accepting their money, hey, go for it. But otherwise, you would almost certainly need to deal with the executor of the estate (who may not even know yet that they are the executor of the estate).

If you aren't careful, you could get into trouble. For example, her daughter works with you to remove the possessions, other family members could potentially sue you (just because the woman is her daughter doesn't mean that she is legally entitled to take the possessions out of the apartment).

If it were me, I would check with an attorney, and at least give the family some breathing room (time) to take care of arrangements. Don't expect to get a check in 4 days.

OK, I think we are in agreement. I read your "CAP-Ex is not an expense. It is a savings plan to cover repairs" and assumed (mistakenly, it seems) that you meant that you do not think that CapEx costs should be considered expenses in a proforma.

To be clear, I definitely agree with you on a few things.

First, estimating your CapEx costs and putting aside that much money every month/year as a savings tool is great (and would help a lot of landlords who don't plan for such costs, and then cannot come up with the money to pay for them, causing even greater expenses, such as fixing the damage from a leaky roof that didn't get replaced).

Second, I agree that your taxes are based on actual expenses, not estimated CapEx. Meaning that if you budget $5,000 a year for CapEx, but have $0 expenses in Year 1 and $11,000 in Year 2, you would show $0 of CapEx expenses on your tax return in Year 1, and $11,000 in Year 2.

The only thing I disagree with is not factoring in CapEx costs as expenses when trying to determine how profitable an investment will be. That, if it is what you are suggesting, just boggles my mind. If the numbers show that I'm going to make $10K/year on my investment, but then I realize I didn't include the cost for new roofs ($10K every 20 years), I'm going to be making $9.5K/year. Whether you call it CapEx, repairs, maintenance, or something else, it's still an expense that affects how much you make on average.

Let's go with a silly example.

I buy an apartment building for $1M, that makes $100K in rent every month, and standard expenses are $100K. I know the building will be worth $1.2M in 10 years, so I buy it, planning to make $200K in 10 years (not knowing that there are better investments out there than this simple example). I ignore the $50K/year CapEx because I read online that it wasn't an expense. After 10 years, I've now had $1M cash come in (rent), and $1.5M cash going out ($1M expenses plus $500K in CapEx costs).

In this (obviously silly) example, after 10 years I get the $1.2M I expected. But throughout that time, I had to shell out $500K of expenses. So what I thought was going to make money lost money.

Now if you include CapEx expenses in your line for repairs in a proforma, all is fine. But those numbers HAVE to appear in your proforma, or else those CapEx costs come out of your pocket and lower the return on your investment.

I guess it depends on what you are looking at. If you are trying to figure out how much taxes you pay each year (for example, if deferring taxes from one year to another can benefit you significantly, due to AMT or something), you need to treat CapEx differently.

But if you are putting together a proforma for yourself to see if a building is worth buying, you need to include CapEx. Because whether you pay $5,000 exactly each year or $10,000 every other year, you're spending an average of $5,000 a year, and that is money that you aren't going to make.

WHAT?

CapEx *is* an expense you need to account for!!!

Let's say you have have $15K of rent every year, and standard expenses (tax, repairs, utilities, etc.) of $5K every year, and budget $5K for CapEx each year (which, we will assume, is accurate). Sure, if there are no CapEx expenses in Year 1, you make $10K of income. But if you have a $10K expense in Year 2, then you have $0 of income. Average those two out, and it's -- wait for it -- $5K of income on average for those two years.

So CapEx is definitely an expense. It's just different in that you could go years without such an expense, or have a whole bunch in one year. The idea of budgeting a certain amount for CapEx isn't just a savings plan, but also to account for the CapEx expenses. Otherwise you are under the impression you are making more money than you actually are.

Or am I missing something?

I'm looking at a multifamily building: about 100 years old, 6 units plus 2 long-term businesses, 4 of the units recently renovated, ~$700K to buy, $92K potential income. The proforma shows $1,200/yr maintenance (along with $2,400 for trash removal and $3,600 for water/sewer, so highly rounded $100/$200/$300-per-month numbers). The maintenance seems very low to me (although I don't think there is a lot of deferred maintenance.

I've done some research here (and elsewhere), and the recommendations for maintenance and capex vary greatly. I often see 10% as a rule of thumb for maintenance (sometimes 10%-15% or as high as 20%), which at 10% would be around $9,200/year. I also see $300-$600/yr/unit as  rule of thumb for maintenance, which would work out to more like 5% here at most.

I also see $250-$450/yr/unit for capex.

The real estate agent thinks budgeting 10% for maintenance is way too high, thinking it should be around $4,000 (factoring in another $1,800 or so for reserve for replacement).

What typically works best, a percentage or cost per unit? Would $5,800/year be realistic to budget for an older property like this? Any thoughts?

                       -Scott

I've read books and these forums, but all I really see about property managers is that they "take care of everything". So let's say I have a 6-unit multi-family, and hire a property manager.

What would I end up needing to take care of myself (e.g. taxes, LLC paperwork if I go that route)? Do they goes so far as to handle evictions?

And, how do the finances work? Does the tenant write out a check to them, or to me? If they get the checks, do they typically just deduct any expenses?

I'm (hopefully) in the last stages of deciding to go ahead with getting a multi-family, and want to get a better understanding of how the property management piece would work.
-Scott

Thanks all; that was very useful information.
-Scott